A Perspective on the "Era of Persistently Low Inflation" and Deflation

Bob Stokes • January 29, 2019

The threat of an unprecedented deflation looms large over the global financial system.

As you probably know, in such a scenario, bankruptcies would be widespread.

The December 2018 Elliott Wave Financial Forecast said:

The risk-heavy global debt structure assures that the next economic downturn will pick up speed fast. The Z-score method for predicting bankruptcies, developed in the 1970s by Edward Altman, suggests that the economic contraction will be massive. When Altman introduced his methodology, which uses profitability, leverage, liquidity, solvency and productivity to predict future insolvencies, he noted that firms with distressed Z-score ratings "almost always went bankrupt within two years." In recent times, companies are using more and more debt to try and stay viable. "There was no leveraged-loan or junk-bond market 50 years ago," says Altman. Bloomberg notes that the total high-yield bond market hit $2.56 trillion in mid-2018, which was higher than the "entire investment grade market at the peak of the last credit cycle in 2007." "These are big dynamic markets available to many firms," says Altman. "They take advantage of it. Firms have been overjoyed to leverage their balance sheet. When we have the next downturn, I think the consequence of these huge increases of debt will be quite dramatic. There will be more bankruptcies and defaults, and larger than ever before."

A Jan. 27, 2019 New York Times also picks up on the theme of deflation with an article subtitled, "Just when we thought we were out, global deflationary forces have pulled us back in." Here's an excerpt:

For much of 2018, it appeared that the world economy was finally getting out of the rut it had been stuck in for the decade since the global financial crisis. But it now looks as if the era of persistently low growth, low inflation and low interest rates isn't over after all.

In the past week alone, the European Central Bank said that economic risks had "moved to the downside," and the Bank of Japan cut its projections for inflation...

Despite some promising signs of vitality during much of last year, issues that have dogged the world economy for the last decade -- an aging work force in many of the biggest economies, weak growth in productivity, excessive global savings and industrial capacity, and a shortage of worldwide demand -- haven't disappeared.

That helps explain why American workers' wages have been rising relatively slowly despite a low unemployment rate. And it makes for a perilous time: Low growth rates mean the economy could slip into recession more easily, and low interest rates mean central bankers would find themselves with less powerful tools to lessen the pain of a future downturn.

"This shows that the forces that are restraining many economies are a lot harder to contend with and more pervasive than many people were hoping or believing," said ... a partner in Cornerstone Macro.

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